About Commodities Spread Betting

Essentially, a commodity is a product whose market value fluctuates on a daily basis as a function of supply and demand. It is usual for such commodities to be bought and sold without differentiation of source or, in some cases, even quality.

Why Trade Commodities?

Commodities trading is a particularly interesting form of investing due to the unique way in which prices are directly affected by supply and demand. The price of a commodity can be influenced by a variety of factors including:

The hurricane season in the US can increase the price of oil by reducing extraction and even refining rates and thereby reducing supply

Poor weather naturally affects crops such as coffee

Less obvious factors – severe power shortages in South Africa threaten to decrease gold extraction rates and, therefore, increased the price of the metal

These reasons make spread betting a useful tool when trading the commodities markets.

This form of trading allows an investor to bet on the price of a commodity to increase or decrease over time. If you think the price of crude oil will go up you can bet on it to go up. If you think the price of gold will go down you can bet on it to go down.

Foreign exchange rates can also have a big impact on the commodities markets. With spread betting, you can often trade in the currency of your choice. Having said that, it should be noted that commodities are generally priced in US Dollars. Therefore, even if you are trading in Sterling you can often see large commodities price movements just because the Dollar has gained on the Pound or vice versa.

A simple advantage of financial spread betting is the wide range of markets on offer. These include oil, gold, stocks and shares, currencies and stock markets like the FTSE 100 or Dow Jones. You can generally trade all these from the same account.

Whilst there are the tax free* benefits of spread betting on commodities there are of course drawbacks to trading these markets. Because spread betting is leveraged an investor can lose more than their initial stake. Nevertheless, the use of stop losses, combined with only risking money that you can afford to lose, can help to limit the potential downsides.

Gold Futures Spread Betting Example

If you’re interested in spread betting on gold then, looking at a platfrom like Spreadex, at the time of writing you would get a quote of $1,294.4 – $1,295.0.

As a result, you could speculate on gold to go higher than $1,295.0 or to go lower than $1,294.4.

With spread betting, investors trade on every unit the market moves up or down; in the case of the gold market a unit is $0.1 of the metal’s price movement.

Let’s say, for this example, you want to bet £3 for every $0.1 gold rises or falls.

Speculating on the Market to Increase

If you bought gold at $1,295.0 and the metal rose then the quote might be re-priced at $1,298.9 – $1,299.5. If that happened, you might choose to close your bet for a profit at $1,298.9.

Speculating on the Market to Decrease

An advantage of financial spread betting is that you can short sell the markets, i.e. speculate that the markets will go down.

If you recall, initially the price was $1,294.4 – $1,295.0.

If you were to sell gold at $1,294.4 and the metal went down then you might see the price drop to $1,289.5 – $1,290.1. Assuming this was the case, you might choose to close your position for a profit by buying at $1,290.1.

One thing to note is that this is a Futures market and therefore there is a predetermined settlement date when it will automatically be closed. In the case of this Gold (December) futures market the expiry date is 25-Nov-14.

Spread Betting on the Market to Decrease

A benefit of placing a spread bet is that you can sell the markets, i.e. bet that the markets will drop.

If you recall, initially the market was priced at $107.05 – $107.09.

If you went short of Brent crude at $107.05 and the commodity market went down then you might see the quote drop to $106.65 – $106.69. If that were to happen, you might decide to close your trade by buying at $106.69.

According to Simon Denham of Financial Spreads, “The recent weakness of the US Dollar has certainly helped bolster the commodities futures markets. With most commodities, like Gold and Crude Oil, priced in dollars, any dollar weakness can help boost the commodity prices.

Gold has shot up to $1,100 level. Whilst the price may have gone a bit too far, too quickly, the trend is firmly in favour of the bulls. Of course, if there is any currency strength it could quickly return the $900 level.

Oil, is a different kettle of fish. When the price hovers around the $70-$80 level then it is firmly at the price level that OPEC is looking to achieve.

There is some pressure though on the oil market to continue higher. Forecast price upgrades have been released by both the US Energy Department and Credit Suisse. Both forecasts point to higher prices through 2010, citing the main drivers as rising demand and falling inventories.

However, it is not a clear one-way bet. If the US Dollar finds some strength then that could weaken the oil price.

What should an investor do? First they should note that all forms of speculation or investment, from trading stocks and shares to having a pension to buying a house, have a negative side.

Spread betting does provide some interesting opportunities with both the oil and the gold spreads markets. Note though that if you spread bet you can lose more than you initially staked.

Spread betting carries a high level of risk. You can lose more than your initial investment or stake. Spread betting may not be suitable for all investors. Only trade with money that you can afford to lose. Make sure you fully understand the risk involved. If necessary, seek independent financial advice.

Spread betting carries a high level of risk. You can lose more than your initial investment or stake. Spread betting may not be suitable for all investors. Only trade with money that you can afford to lose. Make sure you fully understand the risk involved. If necessary, seek independent financial advice.

SpreadBets.org.uk does not endorse the information and analysis available on this site. It is a personal view of the writer and purely for information purposes. Under no circumstances is the information hereon to be used or considered as, an offer to sell, or a solicitation of any offer to buy. The website content does not constitute investment advice and neither the individual writer(s) nor SpreadBets.org.uk accepts any responsibility for any use of the content.

* Spread betting is tax free in the UK. This tax free status is subject to change and can differ if you pay tax outside the UK.